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He’s 66, ready to retire and needs an investment exit strategy

By Deanne Gage Special to The Star

Sun., April 20, 2014

Six years ago when Sean was 60, he quit a stressful full-time job as a business manager.

He still wanted to work, but at a slower pace, so Sean took on a part-time job managing a smaller business, which pays $36,000 a year. Now, at 66, he wants to join his wife Patricia in retirement. What worries him is whether the couple has enough money to be comfortable.

Sean and Patricia want to know if they'll have $50,000 a year after taxes to retire on. (Bernard Weil / Toronto Star)

His salary makes up 40 per cent of their monthly living expenses. The rest comes from Patricia’s $900 a month company pension, their Canada Pension Plan pensions and Sean’s Old Aged Security.

They also have other savings worth $813,000 including $635,000 in Registered Retirement Savings Plans (RRSPs), $51,000 in Tax Free Savings Accounts (TFSAs) and another $127,000 in an investment portfolio. Their mortgage-free Toronto-area home is worth $400,000.

Sean and Patricia want $50,000 a year in after-tax income. Do they have enough assets to reach this target?

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The Star asked Winnipeg financial planner and author Daryl Diamond, president of Diamond Retirement Planning to work with Sean and Patricia.

The good news, Diamond says, is that the couple has more than enough assets to meet their retirement needs. But because they have income from multiple sources — pensions, registered and non-registered accounts and TFSAs — they need a plan to draw on the money in the most tax-efficient manner.

Step one is to split their pension income to lower their tax rates. They get $28,600 a year from CPP, OAS and Patricia’s pension. Diamond says the couple should split Patricia’s pension and their CPP and each claim half. (They cannot split their OAS).

Next, Diamond recommends Sean and Patricia each withdraw $15,700 from their RRSPs each year. That will give the household a combined $60,000 ($30,000 each), which has an after-tax value of $54,000.

This amount is $4,000 more than the couple says it needs, but Diamond has a good idea about what to do with the extra sum. Since they will withdraw this money and still stay in the lowest tax bracket, it’s an opportunity to pay less tax on their investments in the long run. So, Sean and Patricia should redirect that $4,000 to their TFSA (assuming there’s contribution room) or non-registered account. Once the money is moved to TFSA, no more tax is payable. In the case of the non-registered account, they’d be paying a lot less tax than in a registered account.

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Diamond says the couple could actually take $39,000 each from their various accounts (pensions included in this amount) and stay in the lowest tax bracket. Withdrawing from RRSPs now will help to minimize a big increase in income when the couple reaches age 71. Here’s why. At that time, RRSPs must be converted into a Registered Retirement Income Fund (RRIF) or registered annuity. In year one, the rules require them to take out 7.38 per cent of their respective RRIFs, and the withdrawal rates increase from there.

These ever-higher withdrawals can bump retirees into the next tax bracket. It can also mean clawbacks of social benefits like the OAS or the age credit, Diamond says.

The couple has enough money to meet their day-to-day needs with their pensions and RRSPs. If they need a lump sum for something like a car, they could get the money from their TFSA, where they’ll pay no tax.

The lesson: saving for retirement isn’t just about accumulating enough money but ensuring you have what Diamond calls an “exit strategy” for each investment so you pay the least amount of tax.

The problem
: Sean isn’t sure if he should quit his $36,000 a year part-time job. He worries that the couple won’t have enough to live comfortably in retirement. The couple wants $50,000 a year in after-tax income.

The advice:
He can leave his job behind as the couple has enough assets between them. They can manage their assets more tax effectively through income splitting, withdrawing money to bracket and moving some money to more tax-efficient vehicles.

Correction - April 23, 2014:
This article has been edited from a previous version that mistakenly said you can split OAS income between spouses.

If you would like to be considered for Monday Makeover, email
deannegage@gmail.com
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